China: What are its next steps?

How I’d love to have been a fly on the wall when the 21st Century Council think tank – whose guests included former British PM Gordon Brown and his former Italian counterpart, Mario Monti – met with Xi Jinping, the President of China, in the Great Hall of the People last week. The meeting is described by Gideon Rachman, another participant, in today’s FT (£) .

Rachman reports that, at the forefront of most peoples’ minds was economic reform. Specifically, how much reform may be on the agenda when the Chinese Communist Party plenum meets in Beijing this week? Some commentators, according to Rachman, are comparing this week’s meeting to the plenum led by Deng Xiaoping in 1978 – and we all know what happened after that. Will China reform its State-Owned Enterprises (SOEs)? What will happen to the relationship between central and local government? How much political reform might be possible?

And before any of this, is China heading for an almighty economic crisis, or can it really sustain growth of seven per cent until 2020, as it has pledged to do?

In 2000, China set out to quadruple its GDP over 20 years. In decade one, it achieved growth of 10 per cent per annum. Its target for decade two was seven per cent and it is currently on course to meet that target. Moreover, the 12th Five Year Plan no longer seeks growth at any cost: China is now going for inclusive growth, so that the west and rural parts of the country can start to catch up with Beijing, Shanghai and, particularly, the Pearl River Delta cities of Shenzhen and Guangzhou. It is also going for sustainable growth, targeting sectors such as new energy and clean energy vehicles.

Rachman says that many aims sound contradictory. That’s because they are contradictory, but they are only contradictory if we think of China as one country. Strictly speaking it is, of course, but China is actually the size of a continent, while its provinces are closer to the size of European countries. Diverse in character, as well as levels of development, the needs of some provinces are very different to the needs of others. Poorer regions will follow the path of poorer regions everywhere: they will seek to compete on the basis of low cost, low value products, made by workers earning low wages. Once on the ladder, they will seek to upgrade. Sustainable industrial sectors tend to be higher skilled sectors, so over time they will get greener. Until then, some Chinese provinces will continue to burn lots of fossil fuels while others will target something akin to a sustainable industrial strategy. And Beijing will try to hold the whole thing together.

On the reform of SOEs, it must be remembered that, although these are state-owned, most are not monopolies. China’s National Grid, quoted by Gideon Rachman, may be a monopoly (the clue is in the name), but the Shanghai Automotive Corporation is – yes, you guessed it – based in the city that bears its name. It competes with, for example, the Dongfeng Motor Corporation, based in Wuhan. China had been interested in a “national champions” policy up until the Asian Financial Crisis of 1997, but having seen the national champions of other Asian economies fall like ninepins at that time, it decided to keep its regional champions, competing with each other.

Gideon Rachman says that provincial governments will be allowed more room to experiment. Quite right too. After all, the Special Economic Zone of Shenzhen started life as a local experiment: part of the reason that Shenzhen was chosen was its geography, with its proximity to Hong Kong. But another reason was that there was not much happening in Shenzhen, so if it all went wrong, there wasn’t much to lose. It’s hard to imagine this logic now, but it is what Deng Xiaoping was thinking at the time.

Finally, Gideon Rachman says that political reform is likely to be limited to a drive against corruption and a promise of accountability. I think that’s right. In fact, few people in China believe western style democracy is forthcoming and, difficult though it is to understand here in the west, many feel it is not the priority. When I was in China recently, I met with Weiying Zhang of Peking University, described as a follower of Hayek and an anti-Keynesian insurgent. This was at the time of the Bo Xilai prison sentence and Mr Weiying told me the most important political reform was a separation between government and judiciary. Even he didn’t think China was ripe for western-style democracy. I think – I certainly hope – that China will democratise one day. But I suspect Chinese democracy will look more like Asian models of democracy, reflecting regional values, than those of the west.

Finally, on China heading for a crash, Gideon Rachman is humble enough to say that such predictions have been a regular feature of outside analysis for 20 years and regularly the sceptics have been proved wrong. He’s right about that. I wouldn’t bet on China falling apart any time soon.

Written by Tim Page

I’m a Senior Policy Officer at the TUC, responsible for economic and industrial policy. I also cover science policy, public procurement and high performance workplaces. I started my union at the Amalgamated Engineering Union, which is now part of U…